Forecasting Revenues – Study Notes

Revenue basics

• Revenue is the result when sales exceed the cost to produce goods or render the services.
• Cost (costs) refers to the money used to produce/manufacture goods or merchandise, as well as costs incurred in selling the goods.
• Revenue is recognized when earned, whether paid in cash or charged to the customer’s account.
• Other terms related to revenue:
  • Sales: used especially when the business is merchandising or retail.
  • Service Income: used to record revenues earned by rendering services.

Forecasting revenues

• Forecasting is a planning tool that aims to support management or a business owner in adjusting to uncertainties of the future.

Factors to consider in forecasting revenues

1) The Economic Condition of the Country

• When the economy grows, consumers experience growth and are more likely to buy products/services.
• A healthy economy tends to support good business.

2) The Competing Businesses or Competitors

• Observe how competitors are doing business.
• Since you share the same market, information about their daily sales or assortment can give you insight into market demand.

3) Changes Happening in the Community

• Changes in demographics, lifestyle, and buying behaviour influence the market perspective.
• Example: teens may follow celebrities and fashion trends.

4) The Internal Aspect of the Business

• Production capacity, availability of raw materials and labour affect the number of products that can be manufactured.
• The number of salespersons affects revenue potential.
• Example: a “Puto” maker who can produce 250 pieces per day can only sell up to 250 puto per day.

Internal capacity example

• Capacity constraints illustrate how production limits revenue.
• Always align forecasts with plant capacity, resources, and workforce availability.

From factors to projections

• Once factors affecting forecasting revenues are identified, you can calculate and project potential revenues for your chosen business.
• Example framework: Ready-to-Wear (RTW) online selling business.

Example: Fit Mo’t o Ready to Wear Online Selling Business

• Business focus: ready-to-wear clothes for teens and young adults.
• Daily sales (initial data):
  • T-shirts sold per day: 10
  • Jeans sold per day: 6
• Costs:
  • Cost per T-shirt: ₱90.00
  • Cost per jeans: ₱230.00
• Markup: 50% on each item.
• Key definitions:
  • Mark Up Price = ( Cost × desired mark up percentage )
  • Mark Up for T-shirt = ( 90.00 × 0.50 ) = 45.00
  • Selling Price = Cost + Mark Up
  • Selling Price for T-shirt = 90.00 + 45.00 = 135.00
• Daily revenue calculation (illustrative):
  • Revenue = (Number of T-Shirts × Selling PriceT-Shirts) + (Number of Jeans × Selling PriceJeans)
  • With given data: 10 × 135.00 + 6 × (230.00 + (230.00 × 0.50)) = 10 × 135.00 + 6 × 345.00 = ₱3,420.00
• Daily revenue example: ₱3,420.00

Table 1 and initial projections (summary)

• From Table 1: projected daily revenue is ₱3,420.00 (as shown above).
• From Table 2: projected monthly and yearly revenues (based on 30-day month and 12 months):
  • T-Shirts: selling price ₱135.00; volume 300 per month; Monthly Revenue ₱40,500.00; Yearly Revenue ₱492,750.00
  • Jeans: selling price ₱345.00; volume 180 per month; Monthly Revenue ₱62,100.00; Yearly Revenue ₱755,550.00
  • Total: Monthly Revenue ₱102,600.00; Yearly Revenue ₱1,248,300.00
  • Total volume per month: 480 items (300 T-shirts + 180 jeans)
• Computations to verify:
  • Monthly Revenue = Daily Revenue × 30 days: ₱3,420.00 × 30 = ₱102,600.00
  • Yearly Revenue = Daily Revenue × 365 days: ₱3,420.00 × 365 = ₱1,248,300.00

Table 2 details (monthly/ yearly by item)

• T-Shirts: ₱135.00 each; 300 units/month; Monthly Revenue = ₱40,500.00; Yearly Revenue (as shown) = ₱492,750.00
• Jeans: ₱345.00 each; 180 units/month; Monthly Revenue = ₱62,100.00; Yearly Revenue (as shown) = ₱755,550.00
• Total monthly revenue: ₱102,600.00; Total yearly revenue: ₱1,248,300.00

Table 3: Projected monthly revenue (one year) with seasonality

• The table shows a general pattern of revenue changes across the year with specific adjustments:
  • Overall: an average increase of 5% per month, with exceptions for certain months.
  • June: increase of 10% (twice the prior month’s increase).
  • July to October: considered Off-Peak months; July to August see no increase; August to October sees a 5% decrease per month.
  • November to December: 10% increase from November to December due to seasonality.
• The actual monthly revenue values shown:
  • January: ₱102,600.00
  • February: ₱107,730.00
  • March: ₱113,116.50
  • April: ₱118,772.33
  • May: ₱124,710.94
  • June: ₱137,182.04
  • July: ₱144,041.14
  • August: ₱144,041.14
  • September: ₱136,839.08
  • October: ₱129,997.13
  • November: ₱136,496.98
  • December: ₱150,146.68

Calculation details for the monthly adjustments

• Increase (January to February):
  • Projected Monthly Revenue (Increase) = Revenue (January) × 0.05
  • Example: ₱102,600.00 × 0.05 = ₱5,130.00
  • February Revenue = January Revenue + Increase = ₱102,600.00 + ₱5,130.00 = ₱107,730.00
• Decrease (August to September/October):
  • Projected Monthly Revenue (Decrease) = Revenue (August) × 0.05
  • September Revenue = August Revenue − Decrease = ₱144,041.14 − ₱7,202.06 = ₱136,839.08
  • October Revenue similarly declines (per table values): ₱129,997.13
• November to December: 10% increase from November to December:
  • December Revenue = November Revenue × 1.10 = ₱136,496.98 × 1.10 = ₱150,146.68

Important assumptions (Table 3 notes)

• February to May: 5% increase from previous month.
• June: 10% increase from previous month.
• July to August: same revenue (no change).
• September to October: 5% decrease from previous month.
• November: 5% increase from previous month.
• December: 10% increase from November.

Important cautions about revenue figures

• The figures shown are gross revenues, not net profit.
• Net revenue (profit) depends on expenses incurred in operating the business (cost of goods sold, overhead, labor, marketing, etc.).
• An entrepreneur should not be overwhelmed by the revenue figures; focus should be on profitability after expenses.

Practical implications and takeaways

• Forecasts help plan production, staffing, and inventory to meet projected demand.
• Always check capacity constraints (e.g., production capacity, raw materials, labor) when interpreting forecasts.
• Recognize seasonality: RTW businesses may have higher sales during holiday seasons (e.g., December) and slower months (off-peak). Plan financing, marketing, and inventory accordingly.
• Distinguish between gross revenue (top line) and net revenue (profit) after expenses.

Related concepts and formulas (summary)

• Revenue recognition: $ext{Revenue is recognized when earned, whether cash is received or on account}$
• Markup pricing:$ext{Mark Up Price} = ( ext{Cost} imes ext{desired mark up percentage})$
• Example: T-shirt markup from cost 90.00 at 50%:
  • $ext{Mark Up for T-shirt} = (90.00 imes 0.50) = 45.00$
  • $ext{Selling Price} = ext{Cost} + ext{Mark Up} = 90.00 + 45.00 = 135.00$
• Daily, monthly, yearly revenue:$ext{Daily Revenue} = ext{(T-Shirts sold × Selling Price<em>T-Shirts)} + ext{(Jeans sold × Selling Price</em>Jeans)}$
  • For the example: $3{,}420.00 = (10 imes 135.00) + (6 imes 345.00)$
• Monthly revenue:$ext{Monthly Revenue} = ext{Daily Revenue} imes 30$
• Yearly revenue:$ext{Yearly Revenue} = ext{Daily Revenue} imes 365$
• Table 2 revenue aggregation (example):
  • $ext{T-Shirts Monthly Revenue} = 300 imes 135.00 = 40{,}500.00$
  • $ext{Jeans Monthly Revenue} = 180 imes 345.00 = 62{,}100.00$
  • $ext{Total Monthly Revenue} = 40{,}500.00 + 62{,}100.00 = 102{,}600.00$
• Seasonal adjustments example (Table 3): monthly increases/decreases follow predefined percentages as shown in the monthly revenue values above.